Money: Don't give up on the 'sleepy' trusts

Despite their bad press, investment trusts still have plenty to offer, says Philip Middleton

If I were an investment trust, I'd be talking to my analyst. Virtually every article about the trusts recently has slammed them as "under-performing", "sleepy", "fusty" or "struggling". Two funds have been set up simply to pick on the strugglers. Hostile shareholders are circling, uttering war cries such as "shareholder value"' and "restructure now".

Before prescribing either Prozac or hemlock, it is worth looking at the facts. Investment trusts as a whole have risen in value by nearly 20 per cent between the end of 1993 and the end of September 1997. Over the same period, the UK stock market has risen by almost 50 per cent.

The UK has been a strongly performing market, but trusts as a whole have had at least half their own investments outside the UK. The Japanese and Far East stock markets have fallen, and trusts as a whole have been heavily biased towards these areas (largely because this was where investors wanted to invest). Trusts as a whole are also heavily committed to smaller companies in the UK. Notoriously, "small caps" have underperformed the stock market.

So, many of the problems are down to where trusts have been invested: not enough UK banks, too many Asian stocks. Fleming Japanese, a well-run trust, has never had a chance of beating the UK market.

Another chunk of underperformance is down to the widening of the "discount" - the difference between investment trusts' share prices and the value of their underlying investments (called net asset value). At the end of 1993 the sector was trading on as narrow a discount as I have ever seen, around 3 per cent. Now it has widened to around 12 per cent.

I believe it is the discount that really grates with investors - people who bought into new trusts in late 1993 will have seen, on average, 15 per cent wiped off the value of their investments by movements in the discount.

What's worse, many new issues focused on Japan, the Far East and emerging markets. Because of this, you do not have to look hard to find new issues of this vintage which have more than halved.

How have trusts reacted? First, the market for new trusts is shut for all bar highly specialist vehicles. If you believe, as I do, that too much supply leads to price weakness, this is good news. In addition, the sector has started to return cash to investors. If a trust is trading on a discount of 15 per cent, and its assets can be sold easily, then turning it into an open-ended fund (like a unit trust) gives investors a quick one-off boost. What's more, some of this money flows back into other, similar investment trusts, boosting their ratings.

The first big return of capital in the sector this time around came with the ill-starred Kleinwort European Privatisation Trust (Kepit). Launched at the start of 1994, it attracted more money than any trust in history: pounds 880m. It also seemed to attract more odium than any trust in history. This was not so much because it performed particularly badly, but because the gap between what people expected and what they got was so huge. More recently, Mercury European (which has performed well at the portfolio level), has announced plans to buy in 15 per cent of its shares, while Fleming Far Eastern has returned 70 per cent of its assets to shareholders. A number of smaller funds have followed suit, and we expect this will continue until ratings narrow.

So what should the poor investment trust shareholder do? First of all, let's not have too much of the "poor". For example, someone who has held Foreign and Colonial for the past 20 years has beaten the UK stock market usefully, and cash massively. People who have held trusts for shorter periods, and especially those who have bought the 1993-94 splurge of new issues, should ask themselves two questions: "do I want to be invested in Asia/Japan/wherever" and "has the trust I have invested in performed poorly". If the answers to these questions are "yes" and "no" respectively, the best advice usually is to sit tight. Overall, I believe the sector looks good value at the moment, and investors should not let their pique about recent performance obscure this.

What if you have not yet invested in investment trusts? The wrong option is simply to buy funds on big discounts, hoping for a takeover. There may be reasons for wide discounts, and restructuring is still haphazard. I believe that much the better option is to find a well-run trust investing in an area you like the look of, and look to exploit the discounts on offer.

The big picture is clear. Investment trusts as a whole are not "fusty" or "struggling"; they are just cheap.

q Philip Middleton is an investment trust analyst at stockbrokers Merrill Lynch.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Yorkshire Building Society is a leading player in offsets

Offset mortgages: How to save thousands of pounds and reduce the term of your home loan

Offset mortgages make even more sense when savings rates are at rock bottom

A physiotherapist helps a patient – a service one ex-employee was denied after paying for it

Questions of Cash: I've been chased for a phantom debt. What can I do to stop it haunting my credit status?

An Independent reader received a letter stating that a debt with O2 had been sold to a firm called Lowell Financial for collection

My Travel Cash card charges a punitive 'inactivity' fee of €2.50 a month

Simon Read stored the card away for 24 months, which cost him €60

Renting from a rogue landlord? It’s time to know your rights

Some 125,000 tenants have been victims of abusive landlords in the past year

This year's models: buyers have plenty of options as they try to get the money together to drive away from the dealer in a new car

Car finance options: Best way to buy a 65 plate

Sales could find another gear as the '65' registration hits the forecourts next week. Rob Griffin looks at the finance options
In too deep? Travel cover is among the benefits offered by packaged bank accounts

Claims firms blamed as complaints soar over packaged bank accounts

Many customers complained they were switched to the accounts without their knowledge

Finger on the interest rate trigger: the Bank of England

The best deals on personal loans: Peer-to-peer providers are more competitive for smaller sums

Meanwhile, high-street lenders continue to cherry-pick and be more competitive on larger loans

China stock collapse: Five things you need to know about 'Black Monday'

The market plummeted this week, losing all the gains made for the year

Which? warns sports fans about Rugby World Cup ticket scams offers deals that may be too good to be true

Could it be the time to focus on Japan? Some believe the country has no choice but to boost consumption and the economy will get back on track

Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
As rising house prices push up demand for renting, so tenants are having to dig deeper than ever

Starter home initiative is urgently needed as rents go through the roof

Rents in England and Wales rose by 1.9 per cent in July to an average of £804

Peer-to-peer lending rates put Nisas to shame

The returns from P2P providers look more attractive than ever

Questions of Cash: Log-in problems turned eDreams booking into one-way ticket to nowhere

The company failed to provide our reader's flight ticket - or a refund

Hot property: business has been booming in estate agents this month, even though it’s the height of the summer holiday season

Heat rises for mortgage deals as UK homeowners sense a rate hike coming

The housing market should go quiet in August but instead people have been acting like cheap loans won't last. Do we really have to rush, asks Simon Read
Phones have now overtaken personal computers as the most used way of accessing the internet

Who you gonna call? The Complaints Busters

Unhappy customers have been given their own Ombudsman to help fight for them.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea